From Volcker, Andersen's Last Best Hope

March 24, 2002

By Joseph Weber When the leaders of Arthur Andersen LLP brought in former Fed Chairman Paul A. Volcker to fashion an agenda for reforms at the embattled firm, the last thing they probably expected was a coup. And yet, with his Mar. 22 proposal to wrest control of the firm away from top management and vest it in a seven-member governing board, Volcker proposes nothing short of dismantling Andersen's executive ranks. The good news in this is that his bold proposal may represent the last, best hope for keeping Andersen alive.

Volcker, named several weeks ago by the firm as its informal overseer, is proving that he's anything but the window-dressing that critics feared. His newest proposal would offer a graceful face-saving way for the Justice Dept. to back out of its much-criticized criminal indictment. It would give clients reassurance that the Andersen they would be dealing with would be ethically and legally sound, and it could provide Enron's aggrieved shareholders and ex-staffers some satisfaction, if not cash.

If all that sounds too good to be true, it's because several major moving parts must mesh -- and that's the hard part. Even Volcker admits that the plan requires a willingness -- even an eagerness -- on the part of several groups who must see it as in their interest to have Andersen survive, albeit in a far smaller and almost certainly less lucrative form. Prosecutors, partners, and litigants all must sign on if the plan is to have a prayer. "It's only viable if a lot of people agree," the former Fed chairman told BusinessWeek on Mar. 24. "The people who are calling this a long shot are correct."

WELL-ROUNDED BOARD. But a few elements of Volcker's plan do make it at least plausible. Foremost among them is the cast of characters he plans to put in charge of the reconstituted firm. He would chair a new Andersen governing board, which would include two former accounting industry honchos -- ex-Deloitte & Touche Chairman and Chief Executive Officer C. Michael Cook and former Touche Ross Managing Partner Russell E. Palmer -- as well as ex-Andersen partner and former U.S. Comptroller Charles A. Bowsher.

Rounding out the ruling panel would be retired Vanguard Group founder John C. Bogle, former U.S. Senator John C. Danforth, and retired Merck Chairman P. Roy Vagelos.

While he doesn't rule out keeping on current Andersen CEO Joseph F. Berardino in some capacity, Volcker says his panel would overhaul the firm's executive ranks. Among other things, he would sort out reporting responsibility, now highly diffuse because the firm is a collection of partnerships built primarily along geographic lines. Also, as head of Andersen, Berardino doesn't have the power to impose his will unilaterally -- hiring and firing other partners or reorganizing as he sees fit.

QUIET SHUFFLE. Instead, much is subject to votes by partners who are now in sharp disagreement on what to do about the firm's future. Volcker would like to install his own management team, giving him the opportunity to remove any partners whom Justice believes have been tainted by alleged wrongdoings in the Enron case and prior Andersen audit failures. The former Fed chairman has told BusinessWeek that the firm clearly needs "more forceful" leadership.

Indeed, Andersen recently has quietly shuffled its management, putting Chicago-based partner Larry J. Gorrell in charge of all of North America and taking away some responsibility from a top Houston partner. Berardino remains as chief of the worldwide firm, although he has avoided public appearances for weeks. Volcker declines to say what roles Berardino and Gorrell would take, if any, in his new organization.

Andersen managers, while still avoiding public comment, have tepidly accepted the Volcker idea. In a statement released on Mar. 22, the firm said it appreciated "Mr. Volcker's hard work on these issues." It called his plan "a positive and constructive proposal that works to resolve the difficult issues with the SEC, the Department of Justice, and other claimants." And it added that "we hope that the Department of Justice will carefully consider Mr. Volcker's proposal and come to a conclusion based on the best interests of our capital markets."

"A HARD SLOG." Volcker's plan will require much more than the Andersen partners' grudging acquiescence. He wants nothing short of a "whole-hearted commitment of a critical mass of highly qualified Andersen auditing partners" to stay on and recast the firm. Partners, many of whom are already looking at the disappearance of their life savings in the fast-vanishing equity they had built up, must decide whether they're better off trying to dig the organization out of its current hole or leaving to start anew elsewhere.

They'll need to win back lost business and bring in new clients, even while Andersen will be competitively much more limited than its other Big Five rivals. The reconstituted firm would be an almost entirely U.S.-focused outfit based largely on audit work. Says Volcker: "There's got to be enough energy left in Andersen itself to want to engage in what would be a hard slog."

The biggest question marks involve Justice and Enron. First, the feds would have to dismiss the felony obstruction charge or put the case into "suspension" before the scheduled May 6 trial. Volcker's rationale is that the "New Andersen" that he proposes would be "fundamentally different from the indicted firm" and would be "responsive to the legitimate concerns of Justice."

DEATH SENTENCE? Such a rationale could provide for an acceptable way for the Washington prosecutors -- if they're so inclined -- to step back from an indictment that many consider to be essentially a death sentence for Andersen. Already, Justice is getting heat from the likes of Illinois Democratic Senator Richard Durbin and former Securities & Exchange Commission Chief David S. Ruder. They contend that Justice's rush to indict the firm on Mar. 14 put in jeopardy the jobs of thousands of Andersen employees who had nothing to do with Enron.

For the Enron litigants -- the energy-trading company's ex-staffers and shareholders who together lost billions of dollars -- the deal would be tricky, too. They would have to cap Andersen's liability at some mutually agreeable level that would equal the diminishing resources of the firm. Already, Andersen is backing away from its rejected offer of $750 million to settle those cases. Even Volcker isn't sure how much money will be available in the reconstituted firm.

Then again, the Volcker salvage operation may prove to be the best deal the litigants could hope for, at least providing for a going concern to pay some part of their bills. Their calculation: Is something better than nothing?

OUT OF THE PICTURE. Volcker also insists on resolving a pending SEC proceeding with fines and disciplinary actions that would be "consistent with the continued economic viability of the firm." The SEC has been moving against the firm because of its flawed handling of the Enron audits, which Andersen admits. But unlike Justice, the SEC leans toward welcoming reform efforts as a matter of settling disciplinary proceedings.

One group that's no longer crucial to Volcker's plan is Andersen's foreign operation. The offshore offices have been looking for other firms, particularly KPMG and PricewaterhouseCoopers, to rescue them in deals that seem likely to go through. These foreign units together contribute about $5 billion of the firm's $9 billion in annual revenues, meaning the rejiggered Andersen would start out with less than $4 billion in revenues -- and face a big challenge in trying to serve global clients who need work done offshore.

Considering how many issues need to be nailed down, Volcker's plan may ultimately prove quixotic. But with the firm in disarray and facing a continuing loss of clients and talent, a trial whose outcome is at best uncertain, and no real alternatives, it may also represent Andersen's only real chance to survive intact. Weber is Chicago bureau chief for BusinessWeek